Deductions not applied in income tax: avoid losing incentives

Many companies are unaware that they may be missing out on significant tax deductions simply because they have forgotten to apply them. Until recently, when this happened, the solution was clear: either rectify the tax return or apply the deduction in a subsequent financial year. However, since 24 June 2022, the regulations have changed, and this may directly affect your tax planning.

In this article, we explain what has changed, what deductions can be recovered and what deadlines exist so that you do not lose these incentives.

Previous criterion: before June 2022

Until June 2022, if a company did not apply a deduction in corporation tax (IS) —for R&D&I, for hiring people with disabilities, etc.— the tax authorities allowed it to be corrected in two ways:

• Rectify the IS return, provided that it was not time-barred (no more than four years had elapsed).
• Apply the deduction in a subsequent financial year, within the period provided for calculating deductions not applied due to insufficient tax liability (10, 15 or 18 years, depending on the type of deduction).

New criterion: 24 June 2022

On 24 June 2022, the Directorate-General for Taxation (DGT) published two consultations that set a new criterion: if a deduction was not applied in the correct financial year, the only way to recover it was by rectifying the corporation tax return for the financial year in which it had been generated.

This change was detrimental to companies, since if the initial return had already expired when the company detected the error, the tax incentive was lost.

For this reason, many companies appealed this interpretation, arguing that they had applied the previous criteria of the Tax Agency and that the change violated the principle of legitimate expectations.

The TEAC's decision: what is the final solution?

The Central Economic-Administrative Court (TEAC) has resolved this issue as follows:

• Deductions generated up to 2020. The company can choose between rectifying the corporation tax or applying the deduction in a subsequent financial year, following the previous criteria of the Treasury.
• Deductions generated from 2021 onwards. These can only be recovered by rectifying the return for the financial year in which they were generated.

Practical example

If your company, whose financial year coincides with the calendar year, did not apply an R&D deduction in the 2020 corporation tax corresponding to investments made that year, it can still declare it in the 2025 corporation tax, as it has 18 years (until 2038) to do so.

On the other hand, if the deduction had been generated in 2021, the company would only be able to apply it if it amended its 2021 corporation tax return before it became time-barred, i.e. before 25 July 2026.

Recommendations

Check whether you have any deductions generated up to 2020 that have not been applied: you can still recover them in future financial years.

Review the deductions generated from 2021 onwards: if they were not declared, the only option is to rectify the original financial year.